Reports criticize Landry's board

Proxy firms say CEO's pay, lack of independent members among the problems

PURVA PATEL, Copyright 2007 Houston Chronicle

Published 5:30 am, Thursday, September 27, 2007

Three independent proxy firms are recommending shareholders withhold votes for various Landry's Restaurants board members at the Houston-based company's annual shareholder meeting today.

The firms cited different reasons for their recommendations, including: too few independent members on Landry's board, poor oversight of the company's stock-option practices, and the level of pay for Chief Executive Officer Tilman Fertitta.

In a statement Wednesday, Landry's disagreed with the findings and said it does have an independent board.

The statement also noted the board hired an independent counsel to investigate stock-option practices and followed the advice of a pay consultant in determining the appropriate compensation for a company its size in negotiating Fertitta's employment agreement.

The annual meeting at its Houston headquarters is only open to shareholders.

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RiskMetrics Group's ISS Governance Services said in its report that the company's six-member board should be more independent.

Landry's said NYSE rules allow a director to receive up to $100,000 in addition to director and committee fees and still be considered independent.

Aside from Fertitta, the board includes the company's general counsel, Steven L. Scheinthal, and Joe Max Taylor. RiskMetric considers Taylor an affiliated outsider because it said he provides consulting and governmental support services to the company and said he received $60,000 during 2006.

RiskMetrics recommended shareholders withhold votes for Taylor, Fertitta and Scheinthal because they failed to establish a majority independent board.

A panel of Landry's independent directors completed an investigation into stock-option grants earlier this year. The review found that certain grants probably didn't occur on the dates recorded but turned up no intentional wrongdoing by management, the company said.

Still, Glass Lewis said that "the compensation committee failed to protect shareholders' best interests in allowing such practices to occur."

The firm also said the company's compensation committee paid significantly more to Landry's top executives — Fertitta in particular — than its peers in 2006.

"It appears to us that members of this committee have not effectively served shareholders in this regard," the report said.

The company said Fertitta's compensation is in line with the peer group of companies determined by its pay consultant and that Glass Lewis used a different peer group. Landry's said its consultant's group was appropriate.

Glass Lewis also cited Fertitta's business and financial transactions with Landry's that were separate from his roles as chairman and CEO of the company in 2006.

For instance, Fertitta co-owns Fertitta Hospitality Co., which the firm said pays Landry's about $7,000 a month for services and received $567,000 last year from Landry's as part of a lease agreement.

"Although we note that Fertitta is a significant part of the company's management team and the board, we feel the quantity and significance of the related party transactions he is involved in with the company is excessive and may put him in a position where he is forced to weigh his own interests in relation to shareholder interests," the report said.

Landry's said the related-party transactions have been disclosed in its annual proxy statement for the past five years and that Glass Lewis had not singled them out before. It also noted the transactions were reviewed by an independent consultant.

Last week, the advisory firm Proxy Governance recommended shareholders withhold votes for members of the compensation committee — Chadwick, Richmond and Taylor.

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The firm said it believes the board is generally fulfilling oversight duties, but it had concerns on Fertitta's 2006 compensation — including $1.45 million in salary, a $1.58 million bonus, $11.4 million in restricted stock awards and $883,409 in other compensation.